Rating downgrades by Fitch Ratings outnumbered upgrades in 2010, according to a new report by the agency.
Negative outlooks and rating watches also heavily outweighed positive rating outlooks and watches. Fitch attributes the higher number of downgrades in both ratings and outlooks to pressure from the weakened economy and fiscal constraints.
While this is the second year in a row that Fitch downgrades have outpaced upgrades, the number of both upgrades and downgrades decreased from 2009. The agency downgraded 164 credits in 2010, compared to 226 in 2009, and upgraded 103 credits in 2010, compared to 209 in 2009. The 164 credit downgrades represent 3.6% of all rating actions and $121.2 billion in par value. The 103 credit upgrades represent 2.7% of all rating actions and $59.5 billion in par value.
Negative rating outlooks decreased to 229 in 2010 from 297 in 2009. Positive rating outlooks fell to 55, the lowest it has been in six years. The ratio of negative to positive outlooks was 4.2 to 1, similar to what it was in 2009, but a large jump from 2008 when the ratio was 1.6 to 1. The ratio of negative to positive watches was 8 to 1.
The sector to see the biggest change was state and local tax-supported credits, with 98 downgrades and 41 upgrades. Despite this, Fitch said actions on credits that maintained the rating and outlook strongly outpaced both downgrades and upgrades in 2010, “demonstrating the continued overall stability of credit quality within the tax-supported sector.” And while percentage of downgrades in 2010 — which was 8% — matched 2009 levels, fewer ratings had a negative outlook or watch at the end of the year.
The health care sector saw 21 downgrades and 14 upgrades from Fitch in 2010. The agency was optimistic on the outlook for this sector, saying “since the recession began, hospitals have demonstrated a surprising ability to maintain key credit metrics,” adding that through a combination of restricting costs and budgeting, “operating margins have recovered from a downturn that began in 2008 to approach their highs of the past decade.”
Education and nonprofits saw four downgrades and nine upgrades, with the higher amount of upgrades being attributed to stabilization in the financial markets that allowed institutions to recover a big portion of lost wealth. However, most of the universities that were downgraded were expensive private universities that had lower enrollment and therefore lower tuition due to the loss of personal wealth from the financial crisis.
Rival rating agencies reported different results in reports released last month.
For Standard & Poor’s, upgrades exceeded downgrades in 2010, but to a lesser degree than in 2009 and 2008. The 451 downgrades for 2010 was more than three times the 2008 total. Standard & Poor’s said this “reinforces the idea that, despite a continuation of the trend of more upgrades than downgrades, we believe that credit pressures are present and will likely continue in 2011, as the slow recovery and the legacy of the recent recession continue to slow the upward credit quality momentum seen in recent years.”
For 2011, the rating agencies also disagree on the outlook for U.S. public finance. Standard & Poor’s reported the number of upgrades outnumbered downgrades. For the first quarter 2011, there were 437 upgrades, compared to 282 rating downgrades. The last quarter of 2010 saw 240 upgrades, compared to 60 downgrades.
Moody’s Investors Service said its downgrades outpaced upgrades for the first quarter of this year, 66 to 17. Moody’s added that “2011 is expected to be another challenging year across all major municipal sectors and the toughest year so far for U.S. state and local governments since the beginning of the economic downturn in 2008.”
